The EU’s Lost Decade

In the aftermath of the adoption of the Kyoto Protocol in 1997, the EU, led by Germany, remained in the forefront of climate policy by pledging to reduce CO2 emissions by 20% by 2020. To achieve this objective and show the rest of the world how to be successful and green, EU nations adopted renewable energy programs that were supported by lavish subsidies.

The result has been something of a disaster. One nation after another has encountered serious economic problems and begun to back away from spending commitments that did not add jobs but did raise unemployment and electricity prices.

The Wall Street Journal looked at the EU program and concluded: “Europe’s energy crisis is a lot like ours of 40 years ago—self-inflicted. Europe’s dream was untenable the minute energy prices began falling in a major trade competitor like the United States”. The EU program was based on the flawed resource depletion model. As fossil energy resources were depleted, their prices would increase making renewables more attractive. There are several problems with this logic. First, proven reserves of oil and gas have grown, not shrunk. Over the past 40 years, the world has consumed 3 times the proven reserves at the time and today they are at least double what they were then. Second, renewables—wind and solar—are intermittent. When the sun doesn’t shine or the wind blow, where does the energy come from. For most EU countries the answer is coal.

Germany, the leader of the green revolution in the EU, has so far held firm with its commitment to renewable power. How long it can maintain that commitment is an open question. The burden of its green folly has fallen on households and businesses that pay electricity rates that are triple ours. As a result, there is more and more talk about Germany’s “deindustrialization”. Unemployment is far worse than it is here and industries are looking to relocate here because of the cheaper prices that have resulted from the shale revolution.

Last year, Der Spiegel in an article, Merkel’s Switch to Renewables: Rising Energy Prices Endanger German Industry, reached this conclusion: “In macroeconomic terms, the impending demise of heavy industry is all the more worrying, because the job losses will not be offset elsewhere. There is no sign yet of the green economic miracle that the federal government promised would accompany Germany’s new energy strategy. On the contrary, many manufacturers of wind turbines and solar panels complain that business is bad and are cutting jobs. Some solar companies have already gone out of business. The environmental sector faces a number of problems, especially — and ironically — those stemming from high energy prices”.

Bjorn Lomborg, the well known environmental economist, recently observed that using available macroeconomic models, the EU is spending “$280 billion annually to avert $10 billion in damages.” Such bad economic and environmental policies may explain why the Eurozone is mired in a continuing economic malaise. It is nowhere near regaining the level of output and jobs that it had at the start of the financial crisis. With stagnant demand, it is hard to see how the Eurozone solves its financial problems and achieves a position of economic leadership unless it abandons energy, economic, and environmental polices that are a deterrent to investment and job growth.

Five years without a recovery and no near term prospects makes the Eurozone a candidate to emulate Japan’s lost decade. Because of its dominant role in the EU, what Germany does will seal the fate of others unless the EU unravels. So far, Germany looks like it wants to stay the course.